Global Environmental Crisis Changes How Banks Do Business

If you thought the current financial downturn would reduce private sector interest in environmental issues, think again. With severity rivaling that of the economic crisis, the global environmental crisis is also changing the way banks operate.

Last year, some in the media predicted that the financial crisis would cause companies to lose interest in environmental issues because environmental stewardship would no longer be affordable. However, the global environmental crisis is increasing supply chain costs, tightening legislation, and providing new market opportunities. To protect themselves, investors are increasingly factoring environmental concerns into their lending requirements. It is therefore critical that companies understand and address their dependence and impacts on ecosystem change.

This past December, for example, Bank of America and HSBC announced more stringent environmental lending requirements to reduce their risks from ecological degradation. Bank of America will phase out loans to companies that practice mountaintop removal mining. HSBC will cut lending to several palm oil, soy and timber companies in Malaysia and Indonesia where there are suspicions that these companies contribute to illegal or unsustainable logging. While the two banks fared better than most through the economic downturn, they are nonetheless taking measures to ensure their future financial security.

There is growing evidence that investing in companies that threaten the health of ecosystems can be bad business, and not just because of reputational risks. Companies both impact and depend upon healthy ecosystems and the services they provide. Insurance companies, for example, benefit from wetlands' capacity to protect coastal areas from storm surges while agribusiness depends on nature's pollination and erosion regulation. Ecosystem change, therefore, can pose a number of material risks to corporate performance and investors.

Bank of America’s new lending requirement will help shield them from companies vulnerable to lawsuits, fines, and challenges to their social “license to operate.” In 2008, Bank of America’s client Massey Energy paid $20 million in fines for continued water pollution from their strip mines—the largest fine ever imposed for violating the Clean Water Act. This lawsuit followed years of community campaigns against Massey and other mining companies for damage to approximately 1,200 miles of streams and 300 square miles of deforestation, which disrupted drinking water supplies, contributed to flooding, and destroyed wildlife habitats. These negative impacts to community health prompted years of litigation and disruptions to business operations.

HSBC likely considered the recently amended U.S. Lacey Act when tightening its lending requirements to forestry companies. The Act makes it illegal to import into the United States products made from trees that were harvested illegally in the country of origin. When Lacey Act enforcement efforts step up, there will be increasingly strong incentives throughout the entire global forest product supply chain to avoid illegally derived forest products. Wood purchasers will ask more detailed questions about wood sourcing, challenging companies to ensure that their products are not linked to illegal deforestation. Companies that fail to meet these demands will lose access to customers.

Investors are demanding better information and tools to assess the financial impact of emerging environmental risks and opportunities. WRI’s Envest project works with the investment community to help develop methods to quantify the materiality of environmental trends in order to steer capital flows towards ecologically preferable projects and companies.

With banks paying closer attention to corporate environmental performance and fewer funds to go around, some leading companies have competitively positioned themselves to adapt to changing investor preferences, as well as to ecological constraints. These companies will benefit from solidified relationships with investors in addition to an array of other benefits including improved community relations, lower cost of inputs, and new revenue streams.

For example, Syngenta, a global crop protection company, recently conducted WRI’s Corporate Ecosystem Services Review to address risks and opportunities related to ecosystems. Their review highlighted that reduced freshwater availability, loss of topsoil, and other ecosystem services are affecting the viability of Syngenta’s customer base in Southern India. In response, Syngenta expanded research on global water availability and is developing ways to provide farmers with better information to manage ecosystem services on their land. These efforts help ensure the viability of Syngenta’s customers.

An intensive consultant training course will be held at WRI offices on February 10-11 to explore proven methodologies to help companies successfully incorporate ecosystem service considerations into their business strategies.